6694 and request for rulings

Section 1.6694-2(b)(5) of the Proposed Regulations provides that written determinations. The tax return preparer may avoid the section 6694(a) penalty by taking the position that the tax return preparer reasonably believed that the taxpayer's position satisfies the "more likely than not" standard if the taxpayer is the subject of a "written determination" as provided in §1.6662-4(d)(3)(iv)(A).

The final regulations will substitute the “substantial authority” standard for the “more likely than not” standard, but that will not change this exception for the imposition of the 6694(a) penalty.

Section 1.6662-4(d)(3)(iv)(A) provides that there is substantial authority for the tax treatment of an item by a taxpayer if the treatment is supported by the conclusion of a ruling or a determination letter (as defined in §301.6110-2(d) and (e)) issued to the taxpayer, by the conclusion of a technical advice memorandum in which the taxpayer is named, or by an affirmative statement in a revenue agent's report with respect to a prior taxable year of the taxpayer ("written determinations"). The preceding sentence does not apply, however, if --

(1) There was a misstatement or omission of a material fact or the facts that subsequently develop are materially different from the facts on which the written determination was based, or
(2) The written determination was modified or revoked after the date of issuance by
(i) A notice to the taxpayer to whom the written determination was issued,
(ii) The enactment of legislation or ratification of a tax treaty,
(iii) A decision of the United States Supreme Court,
(iv) The issuance of temporary or final regulations, or
(v) The issuance of a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin.
Except in the case of a written determination that is modified or revoked on account of §1.6662-4(d)(3)(iv)(A)(1), a written determination that is modified or revoked as described in §1.6662-4(d)(3)(iv)(A)(2) ceases to be authority on the date, and to the extent, it is so modified or revoked. See section 6404(f) for rules which require the Secretary to abate a penalty that is attributable to erroneous written advice furnished to a taxpayer by an officer or employee of the Internal Revenue Service.

The procedures for requesting technical advice is found in Rev. Proc. 2008-2 and the procedures for requesting rulings is found in Rev. Proc. 2008-1. There revenue procedures are updated at the beginning of each calendar year.

In summary, if you are concerned about the section 6694(a) penalty, you can request technical advice or request a ruling from the IRS on the position you may take. As a practical matter, the request for technical advice must come from an IRS examiner or manager. The IRS examiners do not like to request technical advice; it is a rare accomodation for taxpayers. The request for rulings is cumbersome, but you can rely on a favorable determination. I see no reason why this procedure is not also available to prevent the application of the section 6694(b) penalty.

If you have any questions about this procedure to prevent the imposition of the section 6694 penalties, contact ab@irstaxattorney.com.